Red Violet, Inc. — 2018 Q2 Form 10-Q Summary
Business context and reporting period
Red Violet reported the three and six months ended June 30, 2018. The company provides cloud-based data fusion, analytics, identity, investigation, fraud, compliance and risk-management solutions through its CORE platform.
Fluent, Inc. completed the spin-off of Red Violet’s risk-management business on March 26, 2018. Red Violet began regular-way trading on Nasdaq under “RDVT” on March 27, 2018. Historical 2017 results were prepared on a consolidated and combined basis and may not be indicative of results as a standalone public company.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Change |
|---|---|---|---|
| Revenue | $3.9 million | $2.0 million | Up 96% |
| Adjusted gross profit | $1.8 million | $0.2 million | Up 1,117% |
| Adjusted gross margin | 47% | 8% | Up 39 percentage points |
| Operating loss | $(1.6) million | $(12.1) million | Improved $10.5 million |
| Net loss | $(1.5) million | $(12.1) million | Improved $10.6 million |
| Adjusted EBITDA | $(1.1) million | $(2.4) million | Improved $1.3 million |
| Basic and diluted loss per share | $(0.15) | $(1.18) | Improved $1.03 |
For the six months ended June 30, 2018, revenue was $7.2 million, up 103% from $3.6 million. Adjusted gross profit was $3.1 million versus $0.3 million, and adjusted gross margin was 43% versus 9%. Net loss was $3.6 million versus $15.0 million, while adjusted EBITDA was $(2.5) million versus $(4.1) million.
Q2 GAAP cost of revenue was $2.1 million, or approximately 53% of revenue. Sales and marketing expense was $1.2 million, general and administrative expense was $1.7 million, and depreciation and amortization was $0.5 million. The company reported no income tax expense because a full valuation allowance was maintained against deferred tax assets.
At June 30, 2018, cash and cash equivalents were $15.8 million, compared with $65,000 at December 31, 2017. Total assets were $43.6 million, shareholders’ equity was $38.8 million, and total liabilities were $4.8 million. The filing does not report outstanding debt; the balance sheet lists no debt line item.
Six-month operating cash flow was negative $5.2 million, compared with negative $3.8 million in the prior-year period. Investing cash flow was negative $2.9 million, primarily from $2.9 million of capitalized internal software costs. Financing cash flow was $23.9 million, including a $20.0 million cash contribution from Fluent in connection with the spin-off.
Material changes versus the prior comparable period
- Revenue growth reflected higher product usage and the continued staged release of the product suite.
- Cost of revenue increased only 13% in Q2 despite 96% revenue growth, causing gross margin to expand substantially. Management attributes this to scaling against largely flat-fee data licensing arrangements.
- General and administrative expense declined 84% in Q2 and 72% year to date, primarily because the prior-year periods included $8.3 million and $8.8 million, respectively, of litigation costs related to settled litigation.
- Share-based compensation declined to $49,000 in Q2 from $1.2 million and to $214,000 year to date from $1.7 million.
- Sales and marketing expense increased as the company expanded its sales organization, while depreciation and amortization increased due to internally developed software entering service.
- The company adopted ASC Topic 606 using the modified retrospective method on January 1, 2018; management reported no material impact on the financial statements.
Guidance, outlook, risks and unusual items
The filing provides no formal revenue, earnings or cash-flow guidance. Management reported a $17.2 million annualized revenue run rate for June 2018, with approximately 60% of monthly revenue attributable to customer contracts, generally annual contracts with automatic renewal. Management expects continued investment in sales, marketing, executive, administrative and infrastructure personnel.
Management stated that it expects available cash and cash generated from operations to fund operations and expected capital expenditures for the next twelve months. However, the company remains loss-making and cash-flow negative. If revenue growth or operating cash flow is insufficient, it may need additional equity or debt financing, which could be unavailable or dilutive.
Material data-licensing commitments were reported at $21.3 million in the notes, while the MD&A refers to approximately $21.0 million. The scheduled commitments run through 2022. The company also relies heavily on data suppliers; its largest supplier represented approximately 49% of Q2 and year-to-date data acquisition costs.
Other notable items include the March 2018 spin-off, significant historical related-party allocations from Fluent, and $2.8 million of software development costs capitalized during the first half of 2018. No material legal proceedings were reported. On August 7, 2018, the company terminated its $30,000-per-month MDB consulting agreement and entered into a one-year Executive Chairman Agreement with Michael Brauser providing $30,000 monthly cash compensation plus incentive-plan eligibility.
Important facts for investors to verify
- Assess standalone comparability because 2017 results include consolidated and combined historical results, Fluent expense allocations and unusual litigation costs.
- Reconcile the reported data-licensing commitment of $21.3 million in the notes with the approximately $21.0 million figure in MD&A.
- Evaluate whether revenue growth and recurring contract revenue can reduce ongoing operating and cash-flow losses.
- Review dependence on key data suppliers and the effect of data-acquisition commitments on future margins and liquidity.
- Verify the sustainability of the $17.2 million annualized revenue run rate and management’s expectation of sufficient cash for the next twelve months.
- Monitor potential dilution from the 2018 stock incentive plan, which authorized 3.0 million shares, and any future equity financing.